Elements of a mortgage agreement
The financing approval & loan contract: Here's what should be in it
Received your loan approval and financing contract?
Most people who finance a property — both homebuyers and investors — take out a loan to do it. If you secured the right financing through Urbyo, our experts will guide you through the process and will help you to and help you to receive the loan approval and mortgage contract as quickly and easily as possible.
It depends on your budget calculation and the market value of your property that you want to finance. If those two things check out, you're usually good to go. The bank with say you're creditworthy, which will be followed by the loan approval and the mortgage agreement.
Via mail, you will receive an envelope in which you'll find the loan approval letter, the land charge order documents for the notary, the closing disclosure, a direct debit mandate, data protection consent forms, authentication documents, the ESIS and the Schufa clause. You can read more about these different closing documents in the article below.
Loan approval & mortgage agreement in the mailbox
If you're wondering why you still receive a physical loan approval letter from the bank: Germany still has certain formal requirements for these things and lacks digital solutions. So until they've managed to fix that, you'll still receive a big envelope with your loan approval letter and other important closing documents. These include the land charge order documents for the notary, the closing disclosure, a direct debit mandate, data protection consent forms, authentication documents, the ESIS and the Schufa clause. With this clause, you give the bank consent to report your mortgage to the Schufa, as well any potential inability to pay. But let's take a look at the contents. 👇
Loan approval letter: What does it say?
The contents of the loan approval letter depend on what you've already sent to the bank in advance. It lists the remaining items you need to deliver before they disburse the loan. At this step in the process, that usually includes these three things: the due date notice from the notary, the disbursement order and the land charge order. Other potential missing items will also be mentioned.
Land charge order: What is it?
The land charge order ensures that the land charge is entered into the land register. It protects the bank from any problems with the debtor, aka you. The mortgage agreement already states that you owe the bank monthly payments, but the land charge is another level of protection for the bank.
In case you can't pay your mortgage anymore at some point, the bank has an enforcable title without needing to go through legal proceedings. It can simply sell your property. Of course, this is only possible when there's evidence that you truly can't fulfil the payments.
The contents of your mortgage agreement
The closing documents are included in the envelope you received from the bank along with your loan approval letter. It becomes effective when both parties have agreed to the contract terms with their respective signatures and ends when the loan amount including interest has been paid back in full to the bank. As is usual with contracts, both parties should be listed with their names, addresses and, if applicable, a legal representative, and general terms and conditions need to be defined. Additionally, it should be specified under what conditions the contract can be terminated and what fees and costs are incurred in addition to the interest. These are the other important components that must be included:
Loan amount granted
The contract term
The debit and effective interest rate
The repayment and, if applicable, unscheduled repayment(s)
The fixed interest rate
Land registry fees
The provision-free period & the provision cost amount
Not all of these things are as self-explanatory as the loan amount, so here's some more info on some of the more complicated points:
What are the debit and effective interest rate?
Of course, the interest rate must be stated in the loan agreement. After all, the interest rate determines the cost of your loan. In the case of an annuity loan, which is common for real estate purchases, you usually receive a repayment schedule. When comparing individual offers, look at the debit and effective interest rate.
The debit interest rate expresses what you, as a private borrower, pay for the amount borrowed. The effective interest rate, on the other hand, also considers any additional costs, such as fees. It's the key figure in your calculation. Unfortunately, this isn't as transparent anymore as it was a few years ago. Nowadays, the additional costs often vary from bank to bank. However, if you finance through Urbyo, our experts will scan for these details. In the end, you'll receive the offer that's right for you.
Repayment & special repayment agreement
Not just the interest rates but also the repayment rates need to be stated in the mortgage agreement. The monthly amount and the repayment schedule need to be in the contract. You can either pay the mortgage monthly, quarterly, semi-anually or anually. The repayment rate is often listed alongside the corresponding repayment period.
If you've agreed to include a special repayment option, this should also be in the contract. What is the maximum amount you're allowed to transfer and how often are you allowed to do it? The answers should be in the agreement — as well as an option to skip repayments temporarily.
Fixed interest rate in the private mortgage agreement
Your mortgage agreement should also mention the agreed fixed interest rate. As you can probably tell by the name, it's the time frame for which the bank guarantees you the interest rate, meaning it can neither be increased nor decreased. In Germany, fixed interest rates of 10, 15 or 20 years are common.
Fixed interest rates over 10 years mean a higher risk for a bank, which is why you have a special right of termination once they're up. If, after nine years, the interest rates are lower than in the contract, you can terminate the contract with six months' notice at the end of the tenth year. The bank doesn't have any such right. Our financing experts are happy to advise regarding the fixed interest rate.
Commitment-free period & commitment fee
What even is a commitment-free period? 🤔 It's the time frame within which the bank holds the loan amount for you when you haven't used it yet without asking for an interest rate. When buying an existing property, the delay may be due to organizational matters, although that isn't as relevant. It's mainly useful when you're constructing a building, because you run into delays here a lot more. The commitment-free period can range anywhere from two months to two years. Usually, it's around six months. It's worth comparing different offers from several banks. But thankfully, our experts already do that for you.
Commitment fees can be a form of penalty, if you don't use the money within the commitment-free period.
The early repayment charge in the mortgage agreement
The early repayment charge (ERC) for a mortgage is essentially what is called a prepayment fee for other loan types. When you pay off a mortgage earlier than what was agreed on in the mortgage agreement, you will have to pay an ERC. You can only pay back a mortgage prematurely without an ERC if ten years have passed and you make use of your prepayment privilege — or if your fixed interest rate period has ended, anyway.
The ERC acts as a sort of compensation for the bank since they lose money when you prematurely pay back your mortgage.
What is the ESIS?
ESIS stands for European Standardized Information Sheet. The bank is required to send it to you once the info regarding your creditworthiness is in. It's one of the information duties that a creditor has when it comes to consumer loans. Real estate financing and construction financing are considered consumer loans.
The purpose of the ESIS is to help debtors compare as many financing options as possible. All of the relevant data is transparently summarized there. You can find the commission the loan brokers receive, the loan amount, the loan period, and the interest rates in the ESIS. For debtors, the most useful information is that you can see how high your remaining loan amount is after 10 or 20 years.
After the due date notice you're good to go
The final document before your loan gets disbursed is the due date notice, in which the notary informs you that all the requirements to pay out the loan have been met. Because the disbursement of a mortgage loan is earmarked for the purchase of a property, the bank won't give you the money until the due date notice arrives.
The seller also receives an excerpt of the due date notice. This ensures that both parties know that purchase price that was agreed upon needs to be transferred within the contractually state time frame. Normally, that is within 14 days after receiving the due date notice.
Finally an owner
After the last step has been made, you're finally an owner. Depending on whether you bought the property as a home or as an investment, you're now able to move in or slowly start profiting off of your property yields. To wrap things up, we have good news for you: You can find pre-checked properties on our marketplace for which you can use the integrated calculator to check your yield, cash flow, and other data related to your property. Check it out now!